When Leasing a Car is Good & When It’s One of the Worst Things You Can Do
Q: My husband and I don’t know if we should buy or lease a new car. We have a 14 year old SUV that we bought new at the time, and our dealer tells us that it has kept its value really well. However, it now needs about $2200 worth of work, e.g. new tires, brakes and a battery. I’ve just gone back to school, and that $2200 could be a down-payment rather than a repair bill, letting us get a new car before our old one costs us some serious cash. The dealer has some great offers on new cars right now so we’re wondering, is the splurge for some new wheels worth it? ~Marcie

A: Few things send a bigger shiver down your spine than replacing your vehicle. With so many options to consider, car shopping can be an overwhelming experience. Then once you’ve decided on what you want, the most confusing part is how to pay for it – do you lease, finance it through the dealer, or buy it on your own?
Beyond the feeling you get behind the wheel, buying a brand new car is a big decision. In the first year of ownership, the car will drop in value by about 25%. If you buy (or lease) a $30,000 vehicle, you’ve lost $7,500 in 12 months – that is the price of the splurge. Only you can decide if the peace of mind and reliability are worth the steep price.
Once you’ve determined that new is the way to go for you, and you’ve chosen your make, model, colour and options, it’s time to decide how to pay for it. After looking at your budget, if a key consideration is low monthly payments, you might be attracted to low lease rates.
Leasing, however, is not like renting; you can’t just give it back. Here’s why:
What “Low Monthly Payments” Really Means When You Lease a Car
Many people mistakenly believe that leasing a car is similar to renting an apartment, but there are key differences. One of the biggest differences is cost. With a car lease, your monthly payments consist of two parts: one, interest on the money you’ve borrowed, and two, payments that reduce the borrowed amount (the principal). However, unlike a car loan, you’re not fully paying off the principal during the lease term.
By the end of the lease, you won’t own the car and may have only paid down a portion of its total cost—often less than half. Unless you pay the remaining balance, known as the “residual amount,” which could be up to 40% of the car’s original price, you won’t own the vehicle despite all the payments you’ve made.
This is how dealers manage to offer lower monthly payments for leases: the principal portion of your payment only covers part of the car’s cost, not the full amount. The total amount borrowed in a lease is typically less than when you purchase, so your monthly payments are lower. However, if you don’t pay off the residual amount at the end, you’ve effectively paid a significant amount of interest without owning the car.
Advantages of a Lease
Leasing a car or truck comes with several benefits. One key advantage is that you only pay sales tax on the portion of the vehicle you use, rather than the full price.
Another perk is the ability to drive a new car every few years, as most leases last around four years. For many, the added cost is worthwhile for the peace of mind that comes with warranty coverage and manageable maintenance expenses.
Additionally, lease payments are typically lower than loan payments, making it a flexible option for those navigating a transitional period in life and looking to maintain better cash flow.
Getting Out of Your Lease if Your Situation Changes
When you lease a vehicle, you’re committed to keeping it until the end of the term, regardless of any changes in your financial situation. Exiting a lease can be challenging unless you’re able to negotiate a special arrangement with your dealer. Essentially, leasing means paying to use the car for a fixed period, and when returning it, the vehicle must be in good condition—free of dents, with properly maintained tires and brakes, and no windshield cracks—or you’ll be responsible for repair costs.
Additionally, lease agreements come with specific terms and conditions, including a mileage limit. Exceeding the allowed kilometers can result in costly penalties, so it’s important to monitor your usage throughout the lease.
The Bottom Line on Leasing a Vehicle
There are times in life when it may make sense to lease a vehicle, and who wouldn’t want to drive a new car every 3-4 years. Ultimately you need to decide if the splurge is worth it. However, when the rubber hits the road, most people really can’t afford it. Think about it this way, what else you could do with $625 a month for 12 months? Pay off credit cards, save for a trip, top up your retirement savings…the list is endless. In practical, every-day terms, that’s what the $7,500 depreciation cost in the first year amounts to.
For anyone who likes to own their car for a longer period of time, leasing is one of the worst things you can do from a financial perspective. So before you buy, work out your budget, calculate options, know what you can afford, and let the numbers tell the story.
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